New Yorker Review: Preet Bharara on the Galleon Hedge Fund Trial

New York (HedgeCo.net) – The June 27, 2011, issue of The New Yorker, on page 42, “A Dirty Business”, George Packer, writes about the biggest insider-trading case in history, and has an exclusive interview with Preet Bharara, the United States Attorney for the Southern District of New York, whose office pursued the investigation.

When Bharara took office, in 2009, he made it clear that he would go after Wall Street greed, and the Galleon case helps to illustrate the broader culture of the financial world, in which, “over the past decade, cheating and self-dealing became a principal way to succeed,” Packer writes. But some Wall Street observers have called the Galleon case—which included thousands of taped phone calls by the government and more than two hundred and thirty subpoenas for phone numbers by the S.E.C.—a sideshow.

The case centers around Raj Rajaratnam, the head of Galleon, a multibillion-dollar hedge fund, and Anil Kumar, a former senior executive with the consulting firm McKinsey, who, in 2003, secretly agreed to be an outside consultant to Rajaratnam. In seducing Kumar, Packer writes, Rajaratnam “made a valuable addition to the network that he had built up over the years.”

Initially, Kumar believed that he’d be passing information to Rajaratnam legally, but it wasn’t long before he realized that Rajaratnam wanted tips that he could convert into profitable stock trades, and Kumar began breaking both McKinsey’s confidentiality rules and the securities laws that forbid such exchanges. When Kumar was arrested and subsequently handcuffed, Packer writes, “He fainted, hitting his head against a wall. He had to be treated at a local hospital before he could be brought in for booking.” Later that day, Rajaratnam’s wife sent a text message to Kumar’s wife, which read, “I’m sorry.”

On May 11th, Rajaratnam was pronounced guilty on all charges, but his defense team has vowed to appeal. His attorney, John Dowd, accused Kumar “of being the biggest liar in the history of the Southern District federal courthouse,” Packer writes. After a Wall Street Journal article suggested that his team had been caught off guard by a cross-examination, Dowd shot off an e-mail to the reporter, which read, “This is the worst piece of whoring journalism I have read in a long time. How long are you going to suck Preet’s teat? . . . . Preet is scared shitless he is going to lose this case so he feeds his whores at the WSJ.”

Some people have criticized Bharara’s focus on an insider-trading scandal, given that the financial crisis was caused primarily by shoddy mortgages and the cynical trading of those irresponsible loans.

Bharara, who, until now, hasn’t spoken at length about the lack of financial-crisis prosecutions, tells Packer, “It bothers me a little bit when people suggest, without knowing anything, that we’re not even bothering to look. We have grand-jury secrecy—I don’t go out and announce my investigations. But I got to tell you something: where there’s smoke, we take a look. Do you have any idea how much people want to bring the case if it exists? So, what could be the reason we haven’t? Sometimes people say, ‘It’s because you’re beholden to these guys,’ which doesn’t make any sense. Do we look like we’re afraid to prosecute anyone?”

Packer, after recounting in detail the story of the investigation of Galleon, explains why it wouldn’t be easy to build prosecutions directly tied to the financial crisis. Top bank executives, with the assistance of lawyers and accountants, took care to insulate themselves from the fraudulent activities of mortgage lenders and other low-level players.

The Department of Justice, under George W. Bush’s attorney general, Michael Mukasey, “also played a role in inhibiting vigorous prosecutions,” Packer writes, by distributing the major new investigations across different offices and largely cutting out New York’s Southern District, which has superior experience and expertise in accounting fraud.

Several financial-fraud experts tell Packer that a task force, made up of assistant United States attorneys adept at financial investigations, should have been created, especially in New York’s Southern District, and given two or three years to investigate a single bank. Such a major initiative needed to come from Washington, “but investigating Wall Street’s big banks seems not to have been a top priority,” Packer writes.

The principal accomplishments of President Obama’s interagency Financial Fraud Enforcement Task Force, which was created in November, 2009, have been press releases claiming credit for cases that often predated the financial crisis and involve low-level Ponzi and mortgage-fraud schemes.

“It’s just very hard for me to understand why there haven’t been more indictments,” Ted Kaufman, a former senator from Delaware, tells Packer. “I am incredibly disappointed.” Jeff Connaughton, Kaufman’s former chief of staff, tells Packer that Attorney General Eric Holder “said in his swearing-in that he would make it a priority. We thought we were making sure that they were doing the right thing, and they said all the right things in hearings, and nothing happened.

I feel gamed by it.” Packer writes, “Perhaps indictments couldn’t be brought against top bank executives, but Bharara could take down Rajaratnam, and he went out of his way to give the case a high profile. It was his best chance to deter the pervasive corruption of Wall Street.”

The market “has become more of an exclusive gambling club for the very rich than a level playing field open to the ordinary investor.” But Bharara’s campaign of deterrence “has had a particularly strong effect on hedge funds.” “There are a lot of nervous people out in the Hamptons,” one criminal lawyer says.

And Stanley Sporkin, a retired judge who was regarded as one of the S.E.C.’s most aggressive enforcement chiefs when he served, tells Packer, “People on Wall Street are going to be coming to work with brown pants on. It’s going to change the way they work for a long time.”